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Can IR35 contractors claim director redundancy?

Posted on: Sunday 7th February, 2021

Can IR35 contractors claim director redundancy?

Guidance on contractor eligibility for statutory entitlements upon liquidation

With so many contractor businesses being badly affected by the coronavirus pandemic - dealing with lost contracts and a significantly reduced prospect of finding new work – claiming director redundancy is hugely important.

Statutory redundancy pay can help contractors find a way through these challenging times, when their business income has been severely depleted and there’s little likelihood of being able to make firm plans in the near future.

So when can IR35 contractors claim director redundancy pay?

IR35 contractors and director redundancy

IR35 contractors running limited companies can claim director redundancy in the same way as other directors, if they meet the eligibility requirements. The criteria for claiming redundancy pay as a director includes working under a contract of employment for at least two years continuously, and receiving a regular salary under PAYE.

There are significant issues that could complicate the situation for many IR35 contractors whose company is about to enter liquidation or administration, however, and these involve being in tax arrears and running overdrawn Directors’ Loan Accounts (DLAs).

HMRC tax arrears

Consistently putting money aside for tax is crucial as a contractor, and offers protection from the real possibility of legal action by HMRC in the event of insolvency. HMRC is typically a large creditor in cases of contractor liquidation, and the tax body will resolutely aim to recover any monies owed to them.

Unfortunately, some contractors rely on future work to pay their tax bills, and with the pandemic creating a bleak economic outlook where new contracts are hard to find, tax arrears are inevitable.

So if a contractor does make a successful claim for director redundancy, HMRC may use their ‘right of set off’ to claw back from the redundancy payout the tax they’re owed.

Redundancy claims are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.
Tina Hill
Tina Hill

Overdrawn Directors’ Loan Accounts (DLAs)

When a company enters liquidation, the liquidator’s key role is provide creditors with as high a return as possible. This is typically achieved by selling company assets, and recovering monies owed to the company.

When a director takes money from their Director’s Loan Account it creates a debt that’s owed to the company, and these funds need to be recovered to repay creditors. This can leave IR35 contractors in a seriously precarious financial position personally, and also at risk of misconduct allegations if they’ve failed to protect their creditors’ interests.

HMRC’s right of set-off could significantly reduce the sum available to a contractor from their redundancy payout and in some cases, where redundancy doesn’t cover the amount of tax owed, make the contractor personally liable any outstanding amounts.

Seek early professional guidance from a licensed IP

Contractors in this position need to obtain professional advice from a licensed insolvency practitioner. Redundancy Claims UK has extensive experience of helping IR35 contractors to claim director redundancy, and can provide reliable independent support.

If you’re concerned about personal liability as an IR35 contractor, please contact one of the team to arrange a free same-day consultation. We operate a broad network of offices around the country so we’ll be able to quickly assess your situation and clearly present your best options.

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